A Fool and his Money are Soon Parted

There was an article in the WSJ last week entitled “Safe Stocks” which stirred up some controversy. I didn’t read the article itself, but I understand it used a Smart Money “Foxhole” stock screen to identify stocks with low volatility and high sales growth. Random Roger blogged about this article with a post called “Safe Stocks?” with a chart showing that two of the stocks recommended in the original article are actually quite volatile.

I don’t know where Smart Money gets the beta figures they use to estimate volatility, but different web sites can give widely varying beta figures for the same stock. Perhaps they are comparing the stock to different indexes, or using different time frames for the calculation? Some of them may be using obsolete information.

There may be a better beta reporting service, but the NYSE works for me. The NYSE’s beta figures are consistently realistic, always pass the common sense test, and I think they are updated daily based on incoming data. In addition the information is provided free of charge.

Here are the stocks which were recommended with the beta given in the original article, followed by beta provided by NYSE:

BFAM .60 1.00
CHD .20 .44
FDX .60 1.11
GEHL .70 1.23
OMM .50 1.35
SONC .10 .73
WLP .10 .73
ZMH 0 1.04

It is striking that there is no correlation at all. The discrepancy raises serious doubts in my mind as to whether information from Smart Money or the Wall Street Journal can be trusted. Several of these “safe stocks” are actually much more volatile than the market.

Low beta by itself is no measure of safety, either, but when a stock’s beta is considered along with its dividend yield, a better picture of relative safety can emerge. Secure dividends always enhance a stock’s safety. But if this list of “safe stocks” is screened for dividend yield, it will be seen that only one of them, Church & Dwight (CHD), pays any dividend at all. And CHD’s current yield is a pathetically low 0.67%.

There is no doubt that CHD is a profitable consumer products company – they have cornered the market for baking soda with their Arm & Hammer brand, and they sell other popular items such as Arid deodorant and Trojan condoms – but a quick review of the charts suggests to me that CHD is hardly safe to purchase at this time. RSI indicates the stock is overbought. It is already up 32% for the year too, and in the past there has been a tendency for CHD to crash in late fall or early winter. That pathetic 0.67% dividend yield isn’t going to do much to cushion any decline.

I guess the conclusion is that highly regarded information sources may not be reliable, even if they are charging you for advice. Look before you leap: a fool and his money are soon parted.

2 Responses to “A Fool and his Money are Soon Parted”

  1. Umagumm Says:

    Very nice- if I have time I may email WSJ today for an explanation. Perhaps SM was using long, historical time periods to calculate beta?

    If this was a mistake by SM, then I will say that, in partial defense of WSJ, they are pretty upfront about the fact that they do not hold SM articles to the same standard that they hold their own. On one SM column, the WSJ regularly fixes the warning “Unlike articles by WSJ authors, SM authors may hold positions in equities which they write about” or something along those lines.

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